Safehaven | The Smarter Buffet Shows What'll Happen To Our Savings

March 25, 2004

The Smarter Buffet Shows What'll Happen To Our Savings
by Paul Tustain

In a classic analogy Warren Buffet's Dad illustrated the obscure conflict at the heart of our monetary system. In this short article you can read it for yourself, and enjoy a modern footnote which shows - almost as clearly - how to avoid the misery of experiencing first hand the end of a paper currency system.

America's national debt is now at about 5 times the per capita value of the national debt which caused Argentina's financial system to implode in 2001.

Many people are rightfully concerned. Even the occasional politician has tried to do something about it, but without much success. Suffering under the early phases of this conflict in 1948 Warren Buffet's Dad (who was a Congressman from Nebraska) memorably compared his role in the US government to a brave but ineffectual fireman:-

"There is only one way these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of wealth. Taxpayers must regain their right to obtain gold in exchange for the fruits of their labour. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.

I do not ask you to accept this contention outright. But if you look at the political facts of life I think you will agree that this is the only genuine cure.

There is a parallel between business and politics which quickly illustrates the weakness in political control of money.

Each of you is in business to make profits. If your firm does not make profits it goes out of business. If I were to bring a product to you and say this item is splendid for your customers, but you would have to sell it without profit, or even at a loss which would put you out of business, well I would get thrown out of your office, perhaps politely, but certainly quickly.

In politics votes have a similar vital importance to an elected official. That situation is not ideal, but it exists.

Perhaps you are right now saying to yourself 'That's just what I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some guts. If we elected a Congress with intestinal fortitude it would stop the spending all right'.

I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why? Because an economy Congressman under our printing-press money system is in the position of a fireman running into a burning building with a hose that is not connected to the water. His courage may be commendable, but he is not hooked up right.

When the people's right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass roots to enforce economy in Washington was disconnected.

Truman's promises were to be expected under our paper currency system because his continuance in office depends upon pleasing a majority of pressure groups.

But it was not always this way. Before 1933 the people themselves had an effective way to demand economy. Before 1933 whenever the people became disturbed over Federal spending they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington."

Being 'hooked up right', as Mr Buffet described it, regulated government power by allowing people to demand custody of the private property which underwrote their freedom. If collectively savers were withdrawing backing of government in sufficient numbers to restrain public spending, they were doing so in defence of their own economic freedom, and they were keeping government honest. When they were prevented from withdrawing the support of their money their government began - slowly at first - to spend without restraint. The effects have been falling standards of monetary honesty in public life, the diminution of the worth of money, the theft, by stealth, of the private property of the American people, and the erosion of the liberty which that private property underpinned.

Mr Buffet's wonderfully clear explanation of a difficult subject is often quoted by those who seek a return to a gold standard, but surely they miss the point. What he was showing us is that there is no safe exit from managed paper money. No matter how much we want to go back it cannot be done - certainly not in a democracy - and this is the error of those who protest for a return to sound money. They are wasting their energy.

But while a rescue of the general public is impossible that is not the case for us as individuals. There is still enough freedom left in the system for us to save ourselves, and how better to explain it than by analogy?

The one way street of paper money systems

Picture the printing press money system as a busy one way street, and our currencies as buses trundling along it. They're all taking the same route, but generally doing their job of transporting us quickly along our chosen route. We're free to jump on when we want to, and we can get off to do our shopping. It's certainly a lot faster than walking.

But at the far end of the street all the buses emerge into 'Market Square'. It's bedlam out there; there's always a happy crowd trading at the lowest prices. Unfortunately buses are not allowed to stop in the square itself. If they did everyone would spill onto the street in a mad rush and there would be carnage.

I don't know if you ever jumped off a real bus a stop too early. Isn't it irritating to walk along the street and see the bus you were just sitting on - with all its comfortable passengers - first overtake, and then stop again, right in front of the shop you want to go to? In fact I so hate being the schmuck who jumped too early that now I prefer to stay on until I've actually seen the shop I want. Then I get off at the next stop and walk back a bit. My strategy almost always works. It only fails when the driver forgets to announce the last stop before Market Square.

The driver on our route is a cheerful enough guy called Alan, but he never, ever lets anyone out in the square, no matter how much we all protest. Some time ago he took everyone back to the bus depot with pocketfuls of cash, and there were no shops for miles. What was particularly annoying was that there was another bus heading back, but the tickets were 20 times normal prices. Most of us paid - after all, what choice did we have?

The policy issue at the heart of Mr Buffet's original speech became history when the dollar 'bus' turned into the street in spite of him. From then on the end was inevitable - even if the timing was unknowable. Now the decision to opt out of a weakening dollar as it nears the end of its own journey is a purely private matter. It is still within our rights to get off and walk, but as we look at history with its currency crises, trade tariffs, exchange controls, offshore prohibitions and gold confiscations we should realise that we cannot expect that right to survive a great deal longer. Only later will we know if this was the last stop.

Articles in the series include :-

Regards,
Paul Tustain
BullionVault

Paul Tustain is the founder of BullionVault.com - with 13,000 customers and $600m in gold bars, now the world's largest store of privately-owned investment gold bullion.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.